Commodity ETF Alert January 2013 Issue

| January 8, 2013 | 0 Comments

 

LET’S GET BACK TO BUSINESS!

Finally…

The whole Fiscal Cliff fiasco is a thing of the past.  For the past two months, this issue held commodity markets hostage with uncertainty.

As a result, we were forced to move everything in our commodity portfolio to a “hold” in late 2012 as Washington politicians bickered.

There was simply no way to know what the outcome of those never-ending negotiations would be.

But now that a deal’s been reached, it’s time to get back to the business of making commodity ETF profits.

So let’s get to this month’s trade…

In today’s report, we’re adding a commodity back into the portfolio that we were forced to sell not long ago.

And listen to this…

Since we sold, the commodity has become an even better bargain, yet retains the same bullish fundamentals.

What commodity am I talking about?

… cocoa.

As long time readers know, we entered a bullish cocoa trade in March 2012.  We had to be patient, but eventually cocoa made the bullish move we were looking for in August 2012.

However, the bullish advance fell apart in mid- September 2012 and we were forced to close our long cocoa position in the iPath DJ-UBS Cocoa ETN (NIB) at breakeven.  In other words, we didn’t officially make money on the trade, but we didn’t lose any either.

Since we exited that trade, cocoa prices have fallen even further.  In fact, cocoa’s back at the levels seen in July 2012- $2,260 a ton.  Global economic uncertainty, along with a strong rise in the US Dollar, put cocoa investors on the defensive late last year.

However, like I said a second ago, bullish supply/demand fundamentals still exist for cocoa…

In fact, fundamentals have grown even more bullish over the past few months.

What’s going on?

First of all, the number one grower of cocoa in the world, the Ivory Coast, is expected to see production fall by 13% in the upcoming crop season compared to last year. Output is now estimated to come in at 1.28 million tonnes, as opposed to 1.486 million tonnes seen in last year’s crop.

A potent mixture of under investment, uncooperative weather, and disease setbacks in the Ivory Coast has producers falling behind.

And that has commodity analysts getting bullish on cocoa.

For example…

Rabobank, a leading global agriculture lender, sees cocoa prices moving higher in 2013 due to increasing global demand and shaky West African production.  What’s more, Barclays sees the global cocoa market entering a 108,000 tonne deficit due to unfavorable weather and stronger than expected grindings (demand) in West Africa.

Remember, the Ivory Coast, along with its neighbors Ghana, Nigeria, and Cameroon, supplies nearly 75% of the world’s cocoa.  Production levels out of these West African nations make a big impact on cocoa prices.

So let’s not waste any time. Let’s get long the cocoa market for our first trade of the year.  Given the commodity’s bullish fundamentals, it’s a great way to position our portfolio for profits in 2013!

ABOUT COCOA

We’re investing in cocoa via a different ETN this time around.  As many of you know, we’ve used NIB in the past.  However, the new iPath Pure Beta Cocoa ETN (CHOC) tracks cocoa prices more precisely.

You see, futures contango can affect how an ETN tracks a specific commodity.  If contango is large, the ETN could underperform the commodity by a large measure. That’s why iPath introduced a proprietary method for reducing the effects of contango on their ETNs.

Instead of using a set rolling schedule like they do with NIB, managers of CHOC use an open rolling schedule.  Doing so allows CHOC to more closely mimic the price action of actual cocoa spot prices.

TECHNICALLY SPEAKING

CHOC Chart

As you can see, cocoa’s fallen drastically since September 2012.  And due to the hefty slide in December 2012, the commodity is now oversold on a short-term basis.

That means we have a very good chance of a technical bounce for cocoa in the near future.

And remember, once the bullish fundamentals stated earlier get priced into the market, it’s highly likely CHOC will rise to the $40.00 area.

No doubt about it, now’s the perfect time to take a shot at gains in the cocoa market!

WHAT TO DO NOW

iPath Pure Beta Cocoa (CHOC) is trading at $33.60.
Buy CHOC up to $34.00 per share.
Our profit target is $40.00 or more.

***Editor’s Note***  CHOC is a relatively new ETN compared to NIB.  As a result, CHOC is not as well known and is thinly traded.  Make sure you use limit orders purchasing CHOC.  Do not buy above the maximum buy-up-to-price of $34.00.

 

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $17.11 $16.81    +1.8%
Grains JJG $51.83 $56.17    -7.7%
Industrial Metals JJM $34.81 $35.58    -2.2%
Precious Metals JJP $88.09 $92.48    -4.7%
Softs JJS $52.78 $52.54    +0.5%
Livestock COW $28.66 $28.00    +2.4%
All Commodities DJP $41.00 $41.89    -2.1%

 

ENERGY COMMODITIES

Once energy investors realized the Fiscal Cliff would be resolved without any negative effects on the US economy, crude quickly returned to the $90-$95 a barrel range. Crude’s recent rise isn’t surprising, but it is disappointing that we missed it.

However…

Please remember, the past two months have been an extremely uncertain time for the commodity markets.  Investors really had no way of knowing what the outcome of the recent Fiscal Cliff circus would be.

Going long crude at any point in the last month was basically a bet Washington politicians would get their job done.  And that’s a bet I wasn’t willing to make.

So just be patient, we’ll get another shot at gains in the oil market soon.

As far as natural gas is concerned…

Even though we saw a hefty winter storm work its way across the US recently, long range temperature forecasts still show above average temperatures for key heating regions.

As you know, warm winter weather is bad news for natural gas bulls.  Especially since US gas inventories have yet to see the steep decline needed to keep prices elevated. In fact, natural gas in storage is still 12% above the 5-year average and 2% above last year.

Due to the recent weakness in gas, our position in the United States 12 Month Natural Gas (UNL) stopped out at $16.66 a few days ago. As a result, UNL is closed for breakeven.

We may see another pop in natural gas prices in coming days due to technical buying, but any rally is unlikely to last long.  Let’s be patient and wait for another entry into natural gas this spring.  Natural gas will likely be back below $3.00 mmBtu in coming months.

GRAIN COMMODITIES

Corn, wheat, and soybeans continued their slide lower in recent trading.  Corn is now firmly below $7.00 a bushel, wheat dropped under $8, and soybeans are below $14. Those are substantial price reductions over the past four months.

Why the big drop?

Grain investors were pricing in the possibility of tight supplies in 2013 due to the record drought in 2012.  But recent USDA and other industry reports show farmers will plant so much grain this spring that low supplies are unlikely.

Later this spring we’ll look for another weather-based long trade in grains.  But for now, continue steering clear, as these markets have further downside.

INDUSTRIAL METALS

Industrial metals traded all over the map the past few days.  Powershares DB Multi-Sector Metals Fund (DBB) shot to a new multi-month high of $19.88 after the Fiscal Cliff resolution.

But the strength didn’t last long…

DBB came straight back down once the Fed released their December FOMC meeting notes (more on that in a second).  As a result, we’re still sitting on a slight loss of 1.8% in DBB.

Let’s give this trade a bit more time as copper, zinc, and aluminum should be supported by a strong US and Chinese economy in 2013.

Keep holding DBB for a near-term bounce…

PRECIOUS METALS

There’s no other way to put it.  Precious metals markets have been insane over the past week.

As you’re likely aware, gold surged higher on December 31st and January 2nd as Fiscal Cliff fears went by the wayside.

But on January 3rd, the Federal Reserve released their December 2012 FOMC meeting notes.  And that’s when things got ugly for gold. Upon reading the notes, investors realized the Fed isn’t as committed to long-term quantitative easing (QE) measures as previously thought.

In fact, several Fed officials think it’s appropriate to slow QE measures in mid-2013. That’s a sharp change from what investors thought just a few short weeks ago.

Due to the Fed’s dissension on the matter, the entire precious metals complex endured hefty losses late last week.  Gold dropped to $1,630 on Friday, while silver dove to $29.24.

However, I’m not buying the Fed’s “new” stance…

There’s no way the Fed can stop QE measures within the next six months.  It just isn’t going to happen.  The unemployment rate rose to 7.8% in December, signifying monthly employment gains are still very hard to come by.

But regardless of what I believe, we can’t ignore what’s happening in the marketplace. Our positions in the iShares Gold Trust (IAU) and iShares Silver Trust (SLV) took a hit last week.

Here’s what we’ll do…

First of all, I’m moving SLV back to a buy.  If you haven’t already, go ahead and add this silver ETF to your portfolio at $30.00 or less.  The recent pullback gives investors a nice buying opportunity.

However, let’s keep the $28.50 stop alive in SLV.  In other words, we’re buying SLV at these levels, but we’re not going to risk much to do it.  If silver keeps dropping, we’ll want out of this trade at $28.50.

As far as IAU goes, let’s keep the position at a hold and be patient.  The ETF is still beyond our original buy-up-to-price of $16.00 and we’re sitting on a 4% gain.

Now, on the other hand, our trade in Powershares DB Gold Short (DGZ) is looking good.  We’re up 4% and if gold continues its downward slide, we’ll be looking at even more gains.

Keep DGZ at a hold until further notice…

SOFTS

Most soft commodities have been an unattractive investment over the past 6-8 months.

But as you know, we bought cotton last month and we’re buying cocoa in the first trade of 2013.  These two commodities have fallen too far and now it’s now time to get bullish.

As you know, our trade in the iPath DJ Cotton (BAL) started off nicely last month giving us gains of 3%.  But now BAL is getting more volatile as it trades around the $50.00 technical resistance zone.

Take a look…

BAL Chart

As you can see, BAL rose to the $50.00 level before pulling back last week.  However, it’s completely normal to see investors sell at important technical resistance zones.

Let’s give this trade more time to develop as recent CFTC trade data shows big buyers coming into the cotton market.  Within the next few weeks, we should see BAL rise firmly above $50.00 as long as all other market factors remain constant.

Keep holding BAL for further gains.

Sugar and coffee still have neutral to bearish fundamentals, so prices could go either way in coming months.  Steer clear of sugar and coffee for now…

LIVESTOCK

Beef prices are gaining steam…

Feeder cattle shot to $1.55 a pound in mid-December while live cattle rose to $1.34 a pound… a new 52-week high.  Limited US beef supply, along with strong export activity to Japan, has investors pushing beef prices higher.

As long time readers know, the only ETF exposed to cattle prices that has decent liquidity is iPath DJ-UBS Livestock (COW).  However, this ETF does not track cattle prices close enough for my liking.

So if you’re wondering why I’m bullish on cattle, yet we don’t go long the cattle market via an ETF- that’s why.  There’s really not a good way to play the cattle market via ETFs yet.  If another acceptable ETF becomes available for cattle, I’ll make sure it’s in our portfolio.

Portfolio Changes

  • This month we’re adding cocoa (CHOC) to the portfolio.

 

Category: Commodity Trading